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Aggregate Idiosyncratic Risk and Market Returns

Journal of Investment Management, Vol. 4, No. 4, Fourth Quarter 2006

Posted: 29 Nov 2006  

Turan G. Bali

Georgetown University - Robert Emmett McDonough School of Business

Nusret Cakici

Fordham University

Abstract

This paper tests the empirical performance of a model-independent measure of aggregate idiosyncratic risk introduced by Bali and Cakici (2004) in ICAPM framework. The results indicate a significantly positive relation between the equal-weighted average stock volatility and the value-weighted portfolio returns on the NYSE/AMEX/Nasdaq stocks for the sample period of 1963:08-1999:12. We show that this result is driven by small stocks traded on the NASDAQ. In addition, the positive risk-return tradeoff does not exist for the extended sample of 1963:08-2004:12 and for portfolios of NYSE/AMEX and NYSE stocks. More importantly, we find almost no evidence of a significant link between the value-weighted portfolio returns and various measures of the value-weighted average idiosyncratic volatility.

Keywords: Idiosyncratic Risk, total risk, average stock risk, stock market volatility, stock returns

Suggested Citation

Bali, Turan G. and Cakici, Nusret, Aggregate Idiosyncratic Risk and Market Returns. Journal of Investment Management, Vol. 4, No. 4, Fourth Quarter 2006. Available at SSRN: https://ssrn.com/abstract=947873

Turan G. Bali (Contact Author)

Georgetown University - Robert Emmett McDonough School of Business ( email )

3700 O Street, NW
Washington, DC 20057
United States
(202) 687-5388 (Phone)
(202) 687-4031 (Fax)

HOME PAGE: http://msbonline.georgetown.edu/faculty-research/msf-faculty/turan-bali

Nusret Cakici

Fordham University ( email )

Fordham University
Graduate School of Business
New York, NY 10023
United States
2126366776 (Phone)

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